Tuesday, August 10, 2004

Fed raises target rate by a quarter of a percent

Move is second hike in two months

The Federal Reserve's Open Market Committee today continued its course of raising its target for the federal funds rate by 25 basis points, bringing it to 1.5 percent.

In its policy statement, the Fed said it believes that, "even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity." In recent months, output growth and the pace of improvement in labor market conditions have slowed, which is likely due mainly to the substantial rise in energy prices.

Still, the Fed said, the economy "appears poised to resume a stronger pace of expansion going forward." The Fed kept its wording that policy accommodation can be removed "at a pace that is likely to be measured." However, it did add that it would respond to changes in the economic outlook as needed.

The federal funds target rate is essentially what banks charge each other overnight and does not directly impact mortgage rates. Fixed-rate mortgage rates tend to closely align with the 10-year Treasury bond, which generally reflects what the market is expected to do longer term, as well as any anticipated changes in the federal funds target rate.